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The Aussie dollar continued to claw back some ground on the USD and GBP this week, finishing rather strongly against the JPY as well. The next week shapes as a pivotal one for the medium term performance of the AUD, as an improvement in market sentiment towards the US/China Trade War appears to have contributed to this week’s modest gains. If the G20 Summit outcome is negative or extends the uncertainty further and the RBA cut rates again on Tuesday, it could be a bumpy week for the AUD.

The AUD has shrugged off speculation the RBA will cut rates in July and US/China trade tensions to trade strongly against the USD and GBP this week. In fact, according to Commonwealth Bank analysis, the Australian dollar could actually be up to 11% undervalued at the moment, with their fair value estimate of AUD/USD being around 0.79c.

Why would the AUD be undervalued? Well, the Commonwealth Bank analysis shows that a number of factors are keeping the AUD depressed at the moment – The US Federal Reserve rapidly increasing interest rates last year, the subsequent rise in US bond yield returns and the US/China Trade War. Now that the Federal Reserve is thinking of reducing rates in line with RBA movements, the CBA is predicting a bit more of a rise in the AUD to finish the year.

Any progress is likely to be at a snail’s pace though, with interest rates likely to fall even lower domestically and the Trade War uncertainty still hanging around like a bad smell.

Aussie travellers would certainly love to see the AUD back above 0.70USD, but with the recent volatility unlikely to disappear overnight, there’s probably still some yo-yoing on the cards for the AUD in the short term.

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Boris gives No-Deal ‘million to one chance’, GBP still suffering

With the race still going to decide who will replace Conservative Party leader and Prime Minister, Theresa May, there is no solution to the Brexit conundrum in sight. There was a sight glimmer of what can only be described as positivity as Boris Johnson showed us his gambling side by giving a no-deal Brexit solution a million to one chance under his watch. Johnson said ‘common sense’ will prevail when a new Brexit Bill is debated in Parliament, but if he’s hoping common sense will be enough to get it through, a million to one chance starts looking juicy.

As expected, the only movements for the GBP against major currencies have been sideways and downwards. The GBP performed weakly against the AUD and NZD, went sideways against the USD and took a couple of backward steps against the Euro. Until Brexit is sorted once and for all (and not a no-deal solution) there isn’t much positivity on the horizon for the GBP, with the only positive being the Bank of England’s decision to leave interest rates on hold.

US/China Trade War simmers as world watches G20

President Trump was seemingly trying to aggravate as many people as possible this week as he took aim at The Federal Reserve for failing to drop interest rates, EU regulators for suing US tech firms, Vietnam for being an “abuser” by allowing Chinese goods to evade US tariffs, China for being eager to finalise a trade deal because their economy ‘going down the tubes’, Japan due to an ‘unequal’ military alliance and to top it all off, India for using Trump’s favourite weapon of trade destruction against him, tariffs. Phew, did we get everyone?

President Trump also made clear this week that he was prepared to slap China with additional tariffs if negotiations between the countries failed at the G20 summit this weekend. Trump said that while China is “eager for an agreement” now, a deal was already “90 percent” done before talks collapsed back in May. Trump said the US would insist that the same provisions that were previously agreed to, including intellectual property legislation and measures to open the Chinese market to foreign companies are included in the new agreement.

According to the Wall Street Journal, Beijing has some conditions of their own for the US, including:

Removing its recent ban on US technology businesses dealing with Huawei

Removing all recently imposed tariffs on Chinese imports into America

Stopping its attempts to ‘force’ China to buy more US goods

“Tell him he’s dreaming” is a quote that came to mind when I first read them, but hey, we live in crazy times so who knows.

There are incentives for both the United States and China to get negotiations sorted and trade back on track. The United States economy is starting to feel the pinch with the Federal Reserve citing uncertainty surrounding trade policies as a key reason it may cut interest rates. Stock markets have soared and sunk with president’s tariff tweets on China, Mexico and now India. The tariffs have also stunted the Chinese economy, consumer confidence is down, and growth in industrial production has slowed to a snail’s pace.

In a boost for Trump’s tariffs, US GDP came in as expected at a healthy 3.1%, with exports rising by 5.4% and imports dropping 1.9%. Further data showed that consumer spending remains in the doldrums at 0.9%, and while more people may be buying American, they are buying less on the whole.

If the Federal Reserve do what many economic pundits are expecting and drop interest rates in July, expect the USD to perform a little softer compared to the AUD in the short term despite the cutting cycle of our own RBA. Stay tuned.

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Tim has so far travelled to 28 countries on the quest to find the world’s best vanilla slice. Abroad you’ll find him wandering the streets at night with his camera, immersed in a good book surrounded by nature or lost amongst the history of every museum he can find. At home you’ll find him not keeping up with the Kardashians and researching The World and what makes it tick.